Friday, May 15, 2015

University of Louisville Releases Financial Auditor’s Review Following Court Settlement

The University of Louisville on Monday released a financial auditor’s
review that had been kept out of the public’s eye for more than a year,
the result of a court settlement with the Kentucky Center for
Investigative Reporting.

The February 2014 assessment, prompted by
a series of high-profile thefts and embezzlement, found a system that
had been susceptible to fraud and inappropriate disbursements, among
other shortcomings.

“Because the circumstances that allowed the
frauds to occur have not substantially changed, we believe the
University is still at risk for future fraudulent activity,” the report
notes.

The analysis from Louisville-based auditing firm Strothman and Co.
offers a detailed, qualitative look at financial oversight issues and
includes a series of recommendations, nearly all of which the school
later adopted.

After public records requests were rebuffed, the Kentucky Center for Investigative Reporting in December filed a civil suit in Jefferson Circuit Court seeking the release of Strothman’s 17-page analysis.
The
news organization sought a declaration that the university willfully
withheld records related to the consultant’s examination of the school’s
financial management. U of L claimed the documents were a preliminary
draft and not a final report.

As part of a settlement of the
lawsuit, the university agreed to release the initial report provided to
the school by the auditing firm. The case was dismissed Monday by Judge
Olu Stevens...You can see the report here.

U of L spokesman Mark Hebert released the following statement:

“Settling
the lawsuit at this juncture is the prudent course of action for the
University. The litigation was becoming costly, protracted and a burden
on university personnel. While we believe the attorney general’s opinion
(14-ORD-181)
supports our position that the document in question is a draft and not
subject to public disclosure, we respect the media’s right to differ.
While we believe settling this issue is in the best interests of all
involved, it should not be construed as precedent for the University’s
obligations under the Kentucky Open Records Act.”

“We are
committed to improving our financial controls and accountability. We are
following an aggressive timetable for implementing the recommendations
from Strothman. Many of their recommendations are already in place and
we plan to have all others implemented by the end of the year,” the
statement read.

The Strothman assessment became the basis for a more broad university “consulting report”
released in July that highlighted changes the university was
undertaking or planning to take. That document provided an overview but
did not cite details on particular findings.

Among its many
recommendations, Strothman said U of L should hire a chief financial
officer, add a layer of review in the Finance Office, standardize
security across its computer system, and improve controls over the
payroll system.

The school has paid Strothman more than $160,000
for its work and has previously authorized an additional $100,000 for
the firm to help implement the recommendations.

As part of its
examination, Strothman tried to determine how many bank accounts existed
in the name of University of Louisville, University of Louisville
Physicians or any derivative. The firm requested information from all
banks in a 50-mile radius. The university provided a list of 11
authorized accounts at PNC Bank, as well as one account in the name of
the University of Louisville Athletic Association.

The firm
ultimately found more than 20 additional bank accounts linked in some
manner to U of L. They include accounts for the German Club, the U of L
Sports Administration Club, U of L Parking, and more.

Strothman
also learned of several accounts linked to University Medical
Associates, the previous incarnation of University of Louisville
Physicians. However, Fifth Third Bank told Strothman that they were
unaware of any accounts in the name of the university.

The
auditing firm later found additional accounts linked to previous
entities tied to University of Louisville Physicians, according to the
report.

Strothman determined the banking account matter needed follow-up.

For
all the bank accounts, “management should ensure that follow-up
procedures be performed to determine that these accounts are not being
used for fraudulent or inappropriate purposes,” the report noted.

The
consultants wrote: “As an example, someone who wished to steal receipts
from University of Louisville Athletics could set up a bank account in
the name of ULA, LLC and make deposits into that account if they were
able to physically divert the check.”

The firm repeatedly called for increased oversight and accountability.

In
making a case for creating a CFO position, the auditing company noted
that U of L doesn’t always “compel corrective action” when deficiencies
are identified.” And improvements “recommended by the University’s
internal auditors and others often do not get implemented on a timely
basis.

University controls and policies are often applied inconsistently
or not at all. It was unclear to us who had primary responsibility for
this area.”

U of L later hired Harlan Sands, who earlier this year stepped into the combined role of chief financial officer and chief operations officer.

A
handful of other findings stand out. Strothman found that a manager
requesting a disbursement in at least one department is the same person
to approve the disbursement.

The consultants also sought more
oversight in the hiring of temporary and student employees. There’s
potential a manager “would be in a position to add a fictitious employee
to the payroll system.”

The February 2014 Strothman analysis was
presented to U of L trustees in the board’s April 2014 meeting. Trustees
were given 30 to 40 minutes to review the draft report, but couldn’t
keep copies, according to board member Steve Wilson. At the time, school
spokesman Mark Hebert said the company was still working on the
document.

The university released its own broad “consulting
report” in July. Officials had agreed with nearly all of the firm’s
recommendations, though details on the firm’s findings were sparse.
School leaders noted that many of the changes were already underway.
Read that report here.

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